RBI Postpones LCR Norms by a Year, Providing Major Relief to Banks

In a big relief for banks, RBI Governor Sanjay Malhotra announced on Friday that the implementation of the proposed Liquidity Coverage Ratio (LCR), as well as project financing norms, will be deferred by a year and will not be implemented before March 31, 2026.

He said that the step has been taken as the earlier deadline of March 2025 does not give sufficient time for the implementation of these guidelines. The RBI does not want a disruption in the financial system and will ensure a smooth transition, he added.

Both public sector and private sector banks had opposed these norms announced by then RBI Governor Shaktikanta Das. They were fearing that this might lead to a liquidity crisis in the financial system. The issue was raised with Malhotra by the heads of banks right after he had taken over as RBI Governor when Das's term was ending.

These norms were previously slated to start from April 1, 2025. According to bank treasury officials, in effect what this would do is that instead of lending the over Rs 4 lakh crore to corporates and individuals in order to bolster demand in the economy and consequently grow, banks would have to divert it into buying government bonds.

The Reserve Bank of India had reached out to banks in the last week of January to gauge the impact of its new liquidity coverage norms in the wake of concerns that the move would adversely impact the flow of credit in the economy.

Banks had sought deferment of the norms and alternative mechanisms to cope with the likely hit that their operations would take.

They were worried because they were facing a tight liquidity situation despite the daily variable repo rate auctions that the RBI had started carrying out to inject more money into the system.

The RBI had on July 25 issued a draft circular which required banks to set aside more funds to cover their risks from April 1 this year.

The central bank said that banking has witnessed a rapid change in the past few years. Although increased technology usage has eased the ability to make instantaneous bank transfers and withdrawals, it also resulted in concomitant rise in risks and therefore needed active management and hence, the RBI reviewed the Liquidity Coverage Ratio (LCR) framework in order to enhance the resilience of banks.

The banks were advised to allocate another 5 percent funds as a run-off factor for retail deposits that are facilitated with internet and mobile banking facilities (IMB). Stable retail deposits enabled with IMB shall have a 10 percent run-off factor and less stable deposits enabled with IMB shall have a 15 percent run-off factor.

LCR mandates banks to hold adequate high-quality liquid assets (HQLAs), comprising mainly government securities, so that in case of sudden withdrawals of funds, it would not face a liquidity crunch.
The RBI had declined the request of banks to consider their existing cash reserve ratios for estimating HQLAs.

Banks had also alerted the Finance Ministry about the need to relax the tight RBI guidelines which would have hurt credit growth.